The insurance industry in theU.S.has evolved significantly. Oneof the major reasons for the industry's tremendous evolution andgrowth is that theU.S.is one of the most litigious countries in theworld. But rapid growth hasn't helped companies tackle the threebiggest challenges facing the industry today.

The first is regulation and compliance. Regulation at thestate level has spurred the creation of a number of small insurancecompanies specific to particular states. When these companies wantto grow, the only option they have is to expand into other statesand compete by eating into each other's business rather thangrowing because there is an increased demand in themarketplace.

The second challenge is that the products being introduced byinsurance companies are market-specific or even targeted to groupsand communities that they are trying to service. This combined withstate regulations, is making product innovation harder to achieve.In a recent Limra report, theU.S.was considered third best inproduct innovation behindAustraliaand theUK. However, manycountries are moving toward menu-driven insurance plans, in whichconsumers choose the coverage they need across life, health, andp&c, and insurance companies price the premium rather than sellspecific products.

The third challenge is the sheer number of insurance companiesthat have grown due to regulations and policies. There are over2500 insurance companies in theU.S.and mergers and acquisitionsacross the industry are causing significant integration issues forcarriers. Compare that with two of the fastest growing economies inthe world,IndiaandChina, each of which has less than 50 insurancecompanies and almost four times the population

Unfortunately, insurance companies have never been able toaddress the above three challenges successfully. The issue thataffects them the most is their inability to properly andefficiently integrate companies that they either merged with oracquired. They continue to operate as separate entities, with theexception of financial reporting.

Because they have never addressed business integration, the ITfunction supporting the business has continued to operate onmultiple systems. Regulation has further contributed to this chaos,as each time they tried to do any product innovation it meant theydid it in a different system.

It is impossible to find an insurance company that has one ITapplication for each of its functions. The worst affected are thecore insurance functions for policy administration, claims, anddistribution management. Further, it did not help that insurancecompanies also had siloed operations, with life division, annuitiesdivision, personal lines and commercial lines—all operating asseparate businesses—replicating many of their core functions. Forexample, an insurance company I recently spoke with has $6 billionin net written premiums and 16 policy systems. What's surprising isthat they were spending almost $70 million just to maintain thesesystems every year.

It is a fact that IT costs are significant and for mostcompanies make up three to five percent of their premiums. To addto it, they are only growing with the advent of the social networkworld. The best way to measure that is to compare the IT budgetwith the operating margin that does not include investmentincome.

After this analysis is completed, insurance companies willrealize that outsourcing the IT function and aligning the company'stechnology investments to SLAs that drive their business, will helpthem in launching new products faster. It would also allow insurersto invest in new channels; expand to new geographies for growth;and bring down their IT and operational costs by at least 15 to 20percent year-on-year.

Over time, insurance companies have invested in significant ITassets and it is now time to monetize them and turn IT divisionsinto profit centers.

A simple but fitting example is the work NIIT Technologies didfor a couple of its clients. For one customer that was spendingalmost $15 million in IT and operations and was close to filing forbankruptcy, NIIT was able to create a partnership model that helpedsave 30 percent of their costs, save over 130 jobs and mostimportantly helped them monetize their IT investment in addition tocreating a revenue stream for the future from their ITinvestments.

On a different engagement with a large p&c company that wastrying to implement a third-party policy administration system thathad already overrun both budget and time, NIIT was able to bringdown their additional cost of finishing the project by almost 30percent while committing to firm deadlines and SLAs that wouldbring down the expected timeline to complete the project by almosthalf.

The mantra for insurance companies should be this: Your ITshould be a profit center and enable you to be an insurance companythat utilizes technology and not a technology company thathappens to sell insurance. The best way to ensure that is tomonetize assets and put together appropriate go-to marketmodels.